Fastly Stock Is Spiking as Shares Grow Scarce. They Might Not Always Be.

In Economics 1, you learn how to draw supply and demand curves. One thing you discover is that price is tied to scarcity. When supply goes down, or demand goes up, prices rise. That’s the principle behind Uber’s surge pricing, and it helps explain a recent spike in
Fastly
stock.

Founded in 2011 by CEO Artur Bergman, San Francisco-based Fastly (ticker: FSLY) calls itself an “edge cloud platform.” It includes a content delivery network, or CDN, with other services layered on top.

Companies in the CDN business, like Fastly rival
Akamai Technologies
(AKAM), sit on the edge of the network and speed up access to web content and commerce sites. Companies can reach users faster if they serve up their websites from multiple places around the network, rather than one centralized spot.

That is important for applications where speed matters, like video, say, or e-commerce, where long wait times often lead to abandoned shopping carts. Fastly adds additional services, such as security software and load balancing, to its CDN.

Fastly shares have been swinging wildly since the company went public in May at $16 a share. The stock immediately spiked above $24, then ratcheted gradually back toward the initial public offering price. It recovered to the old highs in July, before sliding anew, this time below the IPO price, on slight disappointment with the company’s June quarter earnings.

Since then? Oh my. As of mid morning, the stock had risen 93% in nine sessions, including Tuesday’s gain of $1.14, or 4.1%, to $28.70.

Exactly what is going on is a little murky, and the company declined to comment on trading activity. But what seems clear is that there is not a lot of stock to buy, and the total is shrinking by the day.

While Fastly has a little over 93 million shares outstanding, most of those are in the hands of insiders and venture investors. Most Fastly shares are still subject to the post-IPO lockup period, which expires in November. For the moment, only the 13 million shares sold in the IPO are available to trade.

And that number is shrinking, thanks to Abdiel Capital, a New York-based investment firm that has been scooping up shares of Fastly with both fists. A few days after the IPO, Abdiel disclosed ownership of 1.8 million of the company’s class A shares, those that were issued in the IPO, via a 13-G filing, indicating a passive investment, with the Securities and Exchange Commission. A few weeks later, the company converted that into a 13-D filing, which implies a more active investing posture.

In its 13-D filing, Abdiel wrote that the firm will keep tabs on Fastly’s “financial condition, business, operations and prospects, conditions in the securities markets, general economic and industry conditions and other factors,” and may engage in discussions with management and the board “about their investment, the business, operations, governance, strategy, capitalization, ownership and future plans of the Issuer and the management and board composition of the Issuer or commercial or strategic transactions.”

One other factor potentially contributing to the new focus on Fastly is a recent IPO filing by Cloudflare, another emerging player in the CDN market. Cloudflare got some unwanted publicity lately for hosting the bulletin-board website 8chan, used by suspects in various recent mass shootings, before pulling the plug.

Piper Jaffray analyst James Fish, who recently began coverage of Fastly stock, wrote in a research note Monday that “a lack of available float is the culprit,” for the recent stock spike, “combined with upward pressure created by its largest shareholder, an overreaction to Q2 results, and a reasonable valuation.”

He adds: “We continue to appreciate the fundamentals but expect further volatility in shares given the lack of float dynamic.”

The interesting question is what will happen when the rest of the Fastly share base becomes tradable after the lockup expires in November. You know what happens to prices as supply increases. It’s not rocket science; it’s Econ 1.

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